Resources for Lenders, Community Bankers & Finance Professionals

1.    Cash.
Where is it deposited?  Is any of it restricted or pledged?

2.    Accounts receivable.
Are they part of the bank’s security?  Does the bank need agings?  How many are uncollectable and should therefore be deducted from assets and equity on the statements?  Is there an allowance for doubtful accounts?  What has been the historical experience of bad debt losses?

3.    Inventory.
Is it pledged?  How is it valued – LIFO, FIFO, or market?  How liquid and marketable is it?  What value would the bank realize from the inventory in liquidation?  Is it excessive, and if so, why?

4.    Notes receivable.
Why do they exist (only financial institutions should routinely have notes as assets)?  Are they collectable?  Can they be taken as collateral?  Are they aged?

5.    Due from officers and employees.
Who are the individuals involved?  What were the circumstances that caused these loans to be made?  Are they collectable in liquidations?  When will they be paid?  Are they excessive in relation to profit generating assets of the firm?

6.    Due from affiliated or related businesses.
Which businesses are they and what are the circumstances?  When will they be paid?  Are they collectable in liquidation?  Are they of such significance as to require consolidated and consolidating statements?

7.    Investments.
What are they and how did they come into being?  (Too often these are a result of speculation; it is probably unreasonable to support the credit needs of a customer when he is draining working capital from the business to make speculative investments.)  How are the investments valued?  How liquid are they?  Could they be used as collateral?

8.    Property and equipment.
Are they all supporting the needs of the business?  Are they stated at cost or market value?  If market valued, who appraised them and how valid is the appraisal?  (They should be valued at cost less depreciation, with both figures on the statements.)  Is any property or equipment encumbered?  How much and with whom?  Has a collateral search been made?

9.    Leases and leasehold improvements.
What are they?  What are their terms?  What are the potential effects on the loan?  Are they assignable and would they have value in liquidation?  Does the bank have a landlord’s waiver?

10. Intangible assets.
Do the statements show goodwill or franchise cost?  (If so, these have little if any value in liquidation and should be deducted from net worth to arrive at a tangible equity position.)

11. Trade accounts payable.
Is the customer staying current in the trade?  If not, how will the customer pay the trade?  (Unpaid trade accounts can force the customer into liquidation!)

12. Other current payables.
Any trouble making the payroll?  Are FICA taxes current?  Will the customer be able to pay his income taxes when they come due?  Is all insurance being kept current?

13. Notes payable.
How many are there and to whom are they payable?  What are their terms, rates, and maturities?  Can the customer service them and the bank’s proposed loan too?  Will the proceeds of the loan pay off other bank debt and if not, will the bank be in a less than first position?

14. Contingent liabilities.
What liabilities does the customer have that are not shown on the financial statements?  What are the potential effects of those on the bank’s loan?  Is there any pending litigation?

15. Term debt.
What assets offset the term debt?  What is the security and who holds it?  What are the current maturities and can they be paid on schedule?

16. Owner’s equity.
Who are the owners?  What is the tangible book value of the equity?  What is the debt-to-worth ratio?  Is the business undercapitalized?

17. Sales.
How are sales recognized?  Are sales made with recourse?  Have the goods or services been delivered?  How many returns are there?  Are intercompany sales excluded?  (Be sure “sales” are actual sales and not a book entry.)



This checklist was produced for the credit training program at Southeast Bank, NA.